Hungary downplays talk of default, says it is committed to meeting budget deficit target

Hungary seeks to contain fallout from default talk

BUDAPEST, Hungary — Hungary tried to minimize fallout from comments about a potential debt crisis Monday as analysts stressed the country’s fiscal situation is nowhere near as dire as that of Greece.

Economy Minister Gyorgy Matolcsy said his government would strive to meet the 2010 budget deficit target of 3.8 percent of gross domestic product, set by the previous administration, downplaying recent comments by other officials suggesting the deficit could reach 7-7.5 percent of GDP and that the country was close to defaulting on its debts.

The statements stunned financial markets and caused both the euro and the Hungarian forint to nosedive. Attempts to backtrack over the weekend did not appear to ease global concern linked to the Central European country.

Matolcsy — speaking on television as the Cabinet met on an action plan — also raised the possibility of a flat tax, as well as tax cuts and a reduction of bureaucracy. Details on the action plan are expected Tuesday, though new Prime Minister Victor Orban already has said efforts would be made to simplify Hungary’s tax system, cut taxes and reduce tax evasion.

In late 2008, EU-member Hungary avoided defaulting on its debts with a euro20 billion loan from the International Monetary Fund, the World Bank and the European Union.

In Luxembourg, IMF chief Dominique Strauss-Kahn said he “sees no reason to be concerned” about the current situation.

“They will do what they have to do; it’s difficult,” he told reporters. “The new government needs to have speeches but I have no special concern.”

He declined to comment about any new bailout or changes to the existing loan.

Analysts said Hungary had done its homework in recent years, and was where debt-stricken Greece should be in two or three years.

Hungary began implementing austerity measures in 2006 to reduce its deficit, said analyst Sandor Richter of the Vienna Institute for International Economic Studies. Comparing the two is “absolutely not” correct, Richter said.

He said the center-right Fidesz party, which recently won a two-thirds parliamentary majority, now faces a tough task of saving face as it realizes its campaign promises of immediate and radical tax cuts are not feasible.

“It is a very delicate situation, but I hope very much that reason will win and that they will follow the economic policy of the previous government,” Richter said.

A recent analysis by the Vienna-based bank RZB Group, meanwhile, said the “doomsday words” of Fidesz politicians were “designed to cool down the expectations of the voters (about the tax cuts) and to prepare them for potentially uncomfortable measures.”

“Clearly, the new government has extremely limited room to maneuver — especially in the shadow of the Greek crises and the Euro-zone debt problems,” it said.

Budapest-based analyst Gyorgy Barcza said meeting the 3.8 percent deficit target this year was possible, and that a flat tax — coupled with better oversight of tax evaders — could help keep the deficit down in the future.

Separately on Monday, Attila Mesterhazy of the opposition Socialists said he was looking into whether currency speculators had targeted the forint.

Associated Press Writers Veronika Oleksyn in Vienna and Aoife White in Luxembourg contributed to this report.